By Timothy Hay

The Wall Street Journal

Avalon Ventures prides itself on making successful bets in diverse areas that other investors overlook.

Avalon’s tech team made an early-stage investment in Zynga Game Network Inc. two years before the social-gaming Gold Rush of 2010 began.

And several years ago, the firm’s biotechnology and life sciences team backed companies working on treatments for “orphan diseases,” an area that received little attention at the time but which is now a high priority for companies like GlaxoSmithKline PLC and Pfizer Inc.

Now Avalon is gearing up for another move into uncharted waters: investing in the business of keeping dogs and cats healthy.

Managing Director Jay Lichter calls it “a new paradigm,” and one that will pay off.

“I recently asked a room full of people, ‘How many of you have spent a thousand dollars or more on your pet’s health in the past year?’ At least half the people raised their hands,” Lichter said. “Currently, there’s no one else in this space doing investing. There is quite a large number of opportunities out there.”

Avalon has already found one. The firm earlier this month backed Aratana Inc. – which is working on pharmaceuticals for dogs and cats – alongside MPM Capital in a $20 million funding round.

Aratana, which has not yet disclosed what types of diseases it will target, aims to license human medicines for use in pets, a less daunting project than taking a drug company from the idea stage to Phase II trials.  Lichter said the approval process for such therapeutics is shorter, as the medicines in question will have already passed certain regulatory hurdles. Additionally, the Food and Drug Administration has less stringent standards for pet medications than it does for human treatments.

“I don’t start from the ‘Eureka!’ idea,” Lichter said. “I’m going to start from a human product that’s late in development. I license it. It makes economic sense. I’m looking for compounds that are currently in human development, and have shown efficacy in at least two species.”

In biotech investing, VCs are used to spending eight years and tens of millions of dollars to get from an idea to Phase II testing. By contrast, an animal health product should take three years and about $5 million, Lichter said.

For later-stage biotech companies, the landscape is approximately 20 large, public pharma and device companies circling around 2,000 start-ups, Lichter said. Animal health is more like 12 large companies being served by five or six start-ups, he said.

Risky? Probably. “But if I don’t take big chances, as a venture capitalist how am I any different than a large corporation?” Lichter said.

“As a fund, we’ve always been in areas before other people. That’s what makes us money. We’ve always been one step ahead.”